Stocks sold off. Investors are expecting volatility, a dynamic that can be self-fulfilling, while the magnitude of fundamental risks to the economy is also quite heavy.
The S&P 500 fell 1.65%. The tech-heavy Nasdaq fell 1.68%, although all sectors had a rough day. The 10-Year Treasury yield rose to 0.76%, a rare move while stocks fall hard. Yields move up when prices fall.
The real yield on the bond is negative, meaning it loses value against inflation, so to see some selling of the bond isn’t necessarily a surprise. Monday started out as a risk-on day, with stocks in most sectors rising.
Speaker Pelosi said over the weekend the White House should have 48 hours to prepare a stimulus deal. Investors want to see stimulus to small businesses and households sooner rather than later, as a deal sooner saves more businesses and people as unemployment is still high and businesses are still cash-strapped and not fully opened.
Still, Pelosi’s prodding of the White House does not necessarily mean stimulus is bound to be deployed into the economy within the next week and investors, generally confident in the continued economic recovery, are holding back a bit on adding to risk assets, as they wait to price in higher probabilities of the availability of multiple coronavirus vaccines and stimulus.
A Biden presidency is expected to yield heavy fiscal spending, but whether the stalling on the near-term round of stimulus will dent the recovery remains to be seen.
That’s the broader picture.
Making matters worse Monday, coronavirus cases in the U.S. have been picking up aggressively. The 7-day moving average of new daily cases in the country is up to around 60,000, up from 55,000 a few days ago and up from 33,000 to conclude the summer into September. The combination of a reversal in reopening momentum and no fiscal stimulus means bankruptcies for small businesses and could mean a slowing down of the recently strong labor market.
Value stocks, most of which are fairly correlated to changes in the economy, fell hard, with the Vanguard S&P 500 value ETF (VOOV) - Get Vanguard S&P 500 Value ETF Report down 1.35% on the day, albeit not falling as hard as the less economically-sensitive tech sector.
Currently, consumers are holding onto cash, as are investors. This is a positive for future consumer spend (when confidence ticks up) and stock prices (when investor confidence picks up). Cash held in money market funds and bank deposits are both above 20% of GDP, according to Strategists from Morgan Stanley.
That’s higher than the same ratios seen in the throws of the 2008 financial crisis. This means that when the recovery picks back up again — if it is indeed to fall off for the immediate — inflation and economic activity could resume aggressively. Investors, though, need to see continued evidence of the economic recovery in order to remain highly engaged in the market.
Also, investors are worried about ballot-counting issues in the election. While investors do not expect drastic policy changes with either candidate winning (Congress is expected to be split fairly evenly between Democrats and Republicans), they do expect some volatility. Uncertainty over who will lead the country and which direction policy will shift at all, could cause near-term risk aversion. Some investors like to get out in front of that dynamic by taking some chips off the table.
Here’s what Wall Street’s saying:
Chris Larkin, Managing Director, Trading and Investment Product, E*Trade:
"We woke up this morning to renewed hopes for a stimulus bill, fueled by an accelerated rise in new cases, which in a backwards sort of way translates into a positive for the market.”
Mike Wilson, Chief U.S. Equity Strategist, Morgan Stanley:
"Last week's failure to break through technical resistance for second time suggests the correction isn't over. We expect softness into and past the election before next leg of bull market. Continue to favor stocks where operating leverage is underappreciated in forecasts. Lack of a deal on fiscal stimulus, election uncertainty, and the second wave of the virus are likely to keep volatility elevated near term and realized volatility around current levels.”
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"A fourth fiscal stimulus bill, if it comes to pass either before or after the election, could cause us to bump up or 2021 growth forecast. It would not affect our longer-term trend as increased transfer payments to households and effected industries only serve to temporarily lift real growth. Sustained recovery and accommodative monetary policy should prove successful in keeping the domestic economy out of the deflation trap Japan has falling into and Europe appears to be sliding into.”
Jason Pride, Chief Investment Officer, Private Wealth, Glenmede:
"Equities still offer relative value in a yield-starved world, but investors should emphasize opportunities beyond mega-caps. valuations on U.S. small-cap and international equities sit at much more reasonable levels, at the 68th and 59th percentile, respectively. As a result, investors searching for relative value within equities may find it away from the largest, most-favored companies.”